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If I send a market order to an exchange with quantity greater than the quantity of the inside quote at this exchange, and if another exchange has quantity to fill the residual portion at NBBO, will my order by routed to that exchange? Will I be charged a routing fee? How does the exchange decide where to route the order in case of a tie?

What happens If I send it with an ISO instruction (intermarket sweep order) to not route it and avoid paying the routing fee. Would the residual be cancelled? Or is it filled on the same exchange at an inferior price? I guess that would be a RegNMS violation.

Also, how is the exchange for the NBBO determined in case of tie? Is it based on the primary listing for the stock?

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  • $\begingroup$ You should go read the various order entry specs and websites for the venues. They have copious amounts of information on how orders can be flagged for various route handling. $\endgroup$
    – Louis Marascio
    Commented Mar 18, 2012 at 4:19

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Normally, an order is indeed routed to a different exchange to fill at NBBO. The exchange will then levy a fee for this routing. I'm not sure how the exchange actually chooses where to route in the case of a tie; I suspect that decision is up to the exchange operator so long as the SEC agrees.

As for an ISO order, the sender is effectively taking responsibility for ensuring the correct price. So for a market order, the exchange is allowed to fill outside the NBBO. This isn't a RegNMS violation since the party that sent the order claims responsibility for it. (That's why there are very strict rules regarding what kind of party is allowed to send an ISO order.)

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  • $\begingroup$ Can you quantify the fee? $\endgroup$
    – Ryogi
    Commented Mar 18, 2012 at 3:16
  • $\begingroup$ The fees are all published and are complicated. There is no "one" fee for inter-exchange routing. However, all fees are public. Look at the exchange websites. $\endgroup$
    – Louis Marascio
    Commented Mar 18, 2012 at 4:18
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Order entry protocols allow the sender to specify how they want their order routed. Some protocols such as NASDAQ's Ouch don't support routing where as others, such as RASH, do. How the order is entered and what flags are set will dictate how the exchange handles routing.

In the case of a no route order you'll simply receive a cancel for the un-executed shares.

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